Inflation can be best described as the substantial rise in the common level of prices for products and services. Inflation is generally calculated as an annual percentage rise of prices. And when inflation increases, every dollar an individual own buys a lesser percentage of a service or product.
The worth of a dollar is calculated in terms of purchasing power of tangible goods that money can purchase. Whenever there is inflation, the value of a dollar tends to change accordingly. When inflation rises, money’s purchasing power shows a decline in its value. That is, after an inflation rise you won’t be able to purchase goods at the same price that you bought last time.
There are mainly three distinctions on inflation
Deflation can be simply described as the opposite of inflation. That is when the common level of prices of products and services is falling it is called deflation.
Hyperinflation is a strange form of rapid inflation. In intense cases, hyperinflation can even cause the breakdown of a country’s monetary system. A noted example for hyperinflation is the one caused in 1923 in Germany, when the prices rose to 2,500% in just one month.
Stagflation can be described as a blend of severe unemployment and economic stagnation together with inflation. During the 1970s, many industrialized countries were victims of stagflation, when a bad economy together with increasing oil prices of OPEC was struck.
It is seen that during the last few years most developed countries tried to maintain an inflation rate of 2 to 3%.
Now let us have a look at what are the main reasons of inflation?
Even though there is no universally agreed cause of inflation, there are two main causes which most of the economists generally have accepted.
Demand-pull inflation means if the demands of products are growing much faster than the supply then the prices of products tends to increase. Demand-pull inflation generally takes place in increasing economies.
Cost-Push Inflation happens when the companies increase the prices of their products to sustain their profits, when the companies’ costs increase. The companies’ costs may go up due to the rising costs of imports, taxes, and wages.
Inflation can affect people in various ways depending on whether the inflation is an expected one or an unexpected one. If the rate of the inflation is what the peoples are expecting, that is anticipated inflation, then the people can compensate it and the price will not be lofty. To tell an example, financial institutions such as banks change their interest rate and the employees can bargain contracts such as wage hikes to compensate it as the price level rises.
To conclude, inflation is an indication of growing economy. If there is no inflation then it must be seen as a sign that weakening economy. It is not easy to decide whether inflation is a good one or a bad one. It purely depends on the total economy together with the people’s personal situation.